Review Questions
for
Inflation and Unemployment
Links take you to to answers or hints. Although it is very tempting to do otherwise, you should make a serious attempt to answer a question before following the link. You will learn a lot about your mastery of the material by comparing your answer with mine.
1. How are the short-run Phillips curve and the AS-AD model related?
2.The Phillips curve implied a static relationship between inflation and unemployment. Friedman and Phelps argued that this relationship was spurious. Why, then, did the Phillips curve appear to fit the data so well?
3. Explain, using the graph of the expectations-augmented Phillips curve, the consequences of a policymaker attempting to maintain unemployment at a level below the natural rate.
4. How did macroeconomic events vindicate Friedman and Phelps so quickly?
5. What is the sacrifice ratio?
6. What are the trade-offs between taking a gradual or "big-bang" approach to reducing the long-run rate of inflation?
7. Policy makers like to smooth fluctuations in unemployment around its natural rate. Doing so requires that one knows what the natural rate is. Why is locating the natural rate of unemployment difficult to do in practice?
8. Why is the NAIRU a misnomer?
9.  Explain the relationship between the rates of job separation and job finding, and the natural rate of unemployment.
10. Discuss some labor market interventions that might increase the rate of job separation. What negative consequences might each policy have?
11. Discuss some labor market interventions that might increase the rate of job finding. What negative consequences might each policy have?
12. How might changes in educational attainment have altered the natural rate of unemployment?
13. How do efficiency wages theories explain persistent unemployment?